On the surface, Altria (MO -0.28%) looks like a dividend investor's dream stock. It has increased its dividend annually for years. It has a huge 8.2% dividend yield. And it operates in the consumer staples area, which is filled with reliable businesses that sell products consumers use on a regular basis.
But don't jump to hit the buy button. There's a very good reason you might want to sell Altria.
Why you would want to buy Altria
Probably the biggest reason to buy Altria is its huge 8.2% dividend yield. That compares to a yield of just 1.2% for the S&P 500 index (SNPINDEX: ^GSPC) and a yield of just 2.5% for the average consumer staples stock, using Consumer Staples Select Sector SPDR ETF (XLP -1.33%) as an industry proxy. Think about that for a second. Altria's yield is nearly seven times larger than that broader market's yield and over three times the size of the yield offered by the average consumer staples company.
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The consumer staples comparison is particularly notable. The sector is known for making small necessities that consumers purchase on a frequent basis in good markets and bad ones. It is, often, thought of as a safer sector on Wall Street. Backing that up with regard to Altria is the fact that the company has increased its dividend on a regular basis for years. And the not-so-subtle fact that Altria owns the top premium brand in the product category it serves, with a huge 42% market share.
If you look at all of those factors, buying Altria seems like a no-brainer decision. And if you have a glass-half-full point of view, it would be reasonable for you to buy Altria.
MO Dividend Per Share (Annual) data by YCharts
Why you might want to sell Altria
The problem here is that Altria's main product is cigarettes. That's compounded by the fact that it operates only in North America, where consumers have made a decided move away from smoking cigarettes. The company's own numbers tell you all you need to know.
In the first half of 2024, Altra's cigarette volumes fell 11.5% year over year. In 2023, volume declined 9.9%. In 2022, the drop was 9.7%. That's just a few years, but the declines go back far longer than that. What's perhaps most shocking is that the best volume year in recent memory was pandemic-impacted 2020, when volume declined "only" 0.4%. When a small decline is a good year for a consumer staples maker, you probably need to worry.
That said, Altria has been able to offset volume declines by raising the price of its cigarettes. That's helped it to continue growing its top line and increasing its dividend. But if any other consumer staples company were dealing with the volume declines that are impacting Altria's main business, investors would likely want to avoid the stock. If you are a conservative income investor, you'll probably want to stay away.
Why you might want to hold Altria
There is a reason to stick around here if you already own Altria. Not too long ago the company bought a vape maker called NJOY. Although it is a small business, plugging the product into Altria's distribution network is delivering incredible growth. For example, NJOY's shipment volume of consumable items increased 14.7% sequentially from Q1 to Q2 (the most recently reported quarter). The number of NJOY devices shipped increased by 80% sequentially. NJOY's retail share increased 1.3 percentage points sequentially.
That hints that Altria may have found a product that can help it offset the ongoing declines in its cigarette business. The only problem is that NJOY is still a very, very small percentage of Altria's overall revenue. So, at best, it will only be able to offset a portion of the declines in the larger cigarette operation, at least for the time being. Still, if you think vapes will replace cigarettes over the long term, NJOY could be a reason to stick it out with Altria.
Not a stock for most dividend investors
Altria is working hard to resolve a very difficult problem, specifically the ongoing decline in its most important business. The huge yield is compensation for the risk that investors face for owning the stock. And while Altria appears to have found a business it can grow (NJOY), it still isn't clear that it can replace cigarette revenue quickly enough to continue supporting the dividend over the long term.
This is not a stock for risk-averse investors. Only more aggressive investors willing to monitor Altria's progress very closely should consider buying it. Yes, the yield is huge and the dividend is growing, for now. But there's a very real possibility that Altria will eventually end up resetting the dividend lower.
